HCA Healthcare, Inc. — Q3 2017 Form 10-Q
Business context and period. The unaudited filing covers the quarter and nine months ended September 30, 2017, compared with the same periods in 2016. HCA operated 177 hospitals and 119 freestanding surgery centers in 20 states and England. Dollars are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue, net of doubtful accounts | $10,696 | $10,270 | $32,052 | $30,849 |
| Provision for doubtful accounts | $1,271 | $840 | $3,104 | $2,392 |
| Income before taxes | $778 | $1,018 | $3,004 | $3,245 |
| Net income attributable to HCA | $426 | $618 | $1,742 | $1,970 |
| Diluted EPS | $1.15 | $1.59 | $4.64 | $4.93 |
| Adjusted segment EBITDA | $1,776 | $1,957 | $5,871 | $6,012 |
- Net revenue rose 4.2% in Q3 and 3.9% year to date, while HCA-attributable net income fell 31.1% and 11.6%, respectively. HCA’s reported net income margin was 4.0% in Q3 versus 6.0% a year earlier, and 5.4% for nine months versus 6.4%.
- Q3 consolidated equivalent admissions increased 2.5% and revenue per equivalent admission rose 1.6%; same-facility revenue increased 2.3%. Same-facility surgeries declined: outpatient 4.2% and inpatient 0.7% in Q3. Emergency visits increased 0.3% on a same-facility basis.
- Operating costs increased faster than revenue: salaries and benefits were 47.5% of revenue in Q3 versus 46.1%; other operating expenses were 19.4% versus 18.5%. Nine-month figures were 46.4% versus 45.8% and 18.6% versus 18.2%, respectively. Interest expense was $427 in Q3 and $1,257 year to date.
- Nine-month operating cash flow was $3,692, down from $3,954. Investing used $3,172, including $1,142 for acquisitions and $2,033 for property and equipment. Financing used $448. Cash ended at $718, compared with $646 at year-end 2016; working capital was $3,837.
- Total debt was $32,953 at quarter-end, including $202 due within one year; the reported average debt life was 7.1 years and average rate 5.2%. HCA had $2,037 available under secured credit facilities at September 30. Shareholders’ deficit attributable to HCA was $6,780.
Material changes and unusual items
- Management estimated Q3 hurricane Harvey and Irma effects at approximately $140 of additional expenses and lost revenue, or $0.24 per diluted share, before possible insurance recoveries. Impacts affected facilities in Texas, Florida, Georgia and South Carolina.
- Q3 included an approximately $50 adverse effect, or $0.08 per diluted share, from final Texas Medicaid Waiver program settlements. Q3 also included a $39 pretax debt-retirement loss and $7 net gains on facility sales. The comparable 2016 quarter included $11 of legal claim costs, a $4 debt-retirement loss and $3 net gains on facility sales.
- Uninsured revenue before deductions rose $513 in Q3 and $843 year to date. The doubtful-account provision increased $431 in Q3 and $712 year to date. Charity care, uninsured discounts and doubtful-account provisions together equaled 36.3% of the associated revenue base in Q3, up from 33.7%; the nine-month comparison was 34.8% versus 32.8%. The allowance represented 99.1% of the $5,465 patient-due receivables balance.
- HCA paid $1,142 for hospital and other healthcare acquisitions in the first nine months, versus $468 in 2016; it reported acquiring seven hospitals, one effective October 1, 2017, and other healthcare entities. It repurchased $1,475 of shares year to date and authorized a new share repurchase program of up to $2 billion in October.
- In June, HCA issued $1,500 of 5.5% senior secured notes due 2047 and redeemed $500 of 8.0% notes due 2018. It increased the asset-based revolver commitment to $3,750 and extended revolving commitments to June 2022.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expected 2017 capital expenditures, excluding acquisitions, of approximately $3.0 billion; projects under construction had an estimated $3.5 billion of remaining costs over five years. Management stated that operating cash flow, credit facilities and expected debt-market access should meet liquidity needs for the next 12 months.
- Management identified substantial indebtedness and refinancing, reimbursement and healthcare-policy changes, uninsured-account collection, staffing and labor costs, patient volumes and payer mix, supplemental-payment programs, competition, litigation and government investigations as risks. Texas’s Medicaid waiver was extended through December 2017, but future extension or payment levels were uncertain. Other states’ supplemental-payment programs were also under review.
- Approximately $4,486 of long-term debt was variable-rate at quarter-end. Management estimated that a hypothetical 1% rate increase would reduce annualized pretax earnings by approximately $45. Expected net professional-liability claim payments over the next 12 months were approximately $419; about $372 related to claims subject to HCA’s self-insured retention.
- HCA disclosed ongoing legal, regulatory and tax matters that could materially affect results, financial position or liquidity. Unrecognized tax benefits totaled $429; management could not estimate the range of possible changes over the next 12 months. Management said Q3 and nine-month 2017 results were not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether hurricane-related losses are offset by insurance recoveries, and whether further storm-related operating effects arise.
- Trends in uninsured admissions, doubtful-account provisions, charity care and collection performance, including the unusually high allowance relative to patient-due receivables.
- The sustainability and terms of Texas and other states’ Medicaid supplemental-payment programs, including the effect of future waiver decisions.
- Acquisition integration, planned capital spending, cash generation and debt levels, refinancing needs and exposure to variable interest rates.
- Progress on share repurchases and the new authorization relative to investment needs and leverage.